Sri Lanka s Experience with Informal Sector Contributory Pension Schemes World Bank-Hitotsubashi University-MOF Workshop on Closing the Coverage Gap: The Role of Social Pensions Tokyo, 20-22 February, 2008 Dr Ravi P. Rannan-Eliya Institute for Health Policy http://www.ihp.lk
Agenda Sri Lanka Context Informal Sector Schemes Problems Potential Solutions Lessons 1
Sri Lanka Context LMIC GDP per capita ~ $1,500, AGR ~ 5-6% Low tax base ~ 17% GDP Fiscal deficits ~ 8% GDP Inflation ~ 8-20% <35% of working age population in formal sector Social protection History of early and high levels of coverage for health, education, poverty transfers driven by early experiences of democratic politics and global recession in 1930s Dominance of general revenue financing - no history of social insurance ~45% of workforce covered by formal old age income schemes 2
Rapidly Ageing Population 80+ High life expectancy ~73 years 70-74 60-64 50-54 40-44 Increasing to 78 years by 2050 Low fertility ~ 1.7 30-34 20-24 10-14 May decline to <1.5 2007 2050 0-4 6 5 4 3 2 1 0 1 2 3 4 5 6 Population (%) 3
Social pensions vs. Social assistance transfers Country Type Beneficiaries/65+ population (%) Social pension impact index (%) Sri Lanka Means-tested SA 23 1.2 India Means-tested SP 14 1.4 Bangladesh Means-tested SP 22 1.6 Nepal Universal, flat SP 21 4.7 South Africa Means-tested SP 86 27.3 Mauritius Universal flat SP 100 27.1 Source: Palacios in World Bank, Sri Lanka Addressing the Needs of an Aging Population (2008) 4
Employment Structure 21% Informal Sector 5 million 5% 16% Workforce (18-65 years) 13 million 36% 17% 7% 4% 7% 16% 7% Civil Servants Private employees (formal) Students Housewives Others Private employees (informal) Farmers/Fishermen Self-employed Migrants 5
Informal Sector Schemes 6
Contributory Pension Schemes Farmers Pension Scheme 1987 ~650,000 coverage ~50-60% coverage Fishermens Pension Scheme 1990 ~45,000 coverage ~40-50% coverage Self-employed Pension Scheme 1996 ~70,000 <5% coverage Flat pension + disability, death and survivor benefits 7
Design of Informal Sector Schemes Government administered Eligibility assessment and administration by public sector Payments collected through decentralized, public sector offices Nominal design Voluntary/Defined benefit/contributory with small tax subsidy Flat contribution schedules, based on age of entry Flat rate benefit at age 60, based on age of entry No inflation adjustment mechanism Pension fund intended to be actuarially sound 8
Contribution Schedules 1,600 60,000 1,400 1,200 1,000 800 600 400 200 50,000 40,000 30,000 20,000 10,000 Annual Pension (Rupees) 0 18 22 26 30 34 38 42 46 50 54 Age 0 Contributions Original pension Current pension 9
Scheme Problems 10
Financing/Benefit design Flat, nominal DB/DC schedules with no recognition of inflation/wage/life expectancy increases Benefits become worthless in real terms, fail to provide adequate or any income protection Political mechanism forces ad hoc upward adjustments to benefits, but not in contributions Not appropriate to demographic realities Life expectancy at age 60: 17-21 years (2001) & increasing Government contribution Assumed in design, but never fully paid - Not clear whether government has fully accepted need for major subsidy Separation of schemes High administrative costs/inefficiencies Weak technical capacity 11
Relevance to informal sector Fixed contribution schedule (1 mos/3 mos) not appropriate Not appropriate given income flow/career paths High rate of default due to non-payment >40% Political mechanism intervenes to forgive defaults Inflexible to demands of dynamic economy Lifetime membership in occupation not option for many Lack of portability not suited for industrializing economy, with significant rural-urban migration No option to increase contributions with income growth Doesn t reach poorest Evidence that enrollees are wealthier than average 12
Current cash flows 180 160 166 140 120 117 Rs millions 100 80 67 75 90 60 46 40 31 20 0 1 2 2 3 3 5 6 1996 1997 1998 1999 2000 2001 2002 Farmers Fishermen 13
Financial outlook Current cash flows positive, as schemes still not mature But will change as outflows rapidly increasing Not actuarially balanced Largely due to initial design errors, and later benefit adjustments Large, implicit fiscal debts 5-15% of GDP 14
Potential Solutions 15
Income adequacy Common characteristics of informal workers Lack of steady income Frequent employment transitions Higher rates of hard, manual work Higher rates of disability Less likely to be able to work to 65+ years Income constraints Below average incomes Subsistence level implying inability to forego consumption 20%+ contribution rates insufficient to generate replacement incomes above poverty line Shorter working lives 16
Design improvements Contributions Should allow for flexibility in payments Over the year Over a lifetime Should allow for employment changes & be compatible with extending working lives Benefit design Should be actuarially linked to lifetime contributions But recognize social preference to ensure minimum pension floor And political willingness to use tax money to pay for lowest wage workers 17
Possible solution (1) Contribution-based scheme Initially for self-employed groups Individual lifetime accounts, facilitated by use of unique lifetime personal IDs Contributions at any time No maximum age for contributions Account balances credited with investment returns of scheme Option later for formal worker groups to opt in Switch existing provident fund balances in with guarantee of no benefit losses Retaining requirement for employer contribution 18
Possible solution (2) Benefits Pension annuity at retirement age With incentives for deferral Inflation indexed Minimum payment based on social assistance levels Government contribution to individual accounts targeted to lower-wage earners How much and on what basis? General revenue or ear-marked taxes? Requirement for scheme to adjust benefits taking into account actuarial affordability 19
Lessons (1) 1. Income adequacy in old age is also a political problem In a democratic context, inadequate solutions will result in political corrections 2. Informal sector/self-employed are poor Real problems of collection and insufficient/discontinuous incomes Will require redistributive, tax financing to achieve income adequacy 20
Lessons (2) Fluid employment paths must be accommodated, esp. in dynamic growing economy Requires shift to integrated, national pension systems Setting optimal benefit schedules, subsidies, tax contributions is political Has to be done in steps Take into account social reactions Contributions and taxes both politically necessary 21
Lessons (3) LMICs can do well to learn more from Japanese/US experience Sri Lanka s current needs/demands not that dissimilar to Japan in 1950-60s US Social Security System design in 1930s still relevant to Sri Lanka in 2000s GoJ and WB should do more to share Japanese/US experience with LMICs 22
Thank You 23